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Topic: What asset allocation do you recommend for FIRE? (Read 3551 times)

I have a question that’s probably on the complex end—apologies in advance. In a nutshell, the question is: “What asset allocation do you recommend for FIRE?”

Here’s the context.

In most of his posts, MMM tends to avoid asset allocation entirely, saying you could just have your funds 100% invested in a total stock market index fund and be alright. But if you read the Bogleheads (and most of the people even on THIS forum), NOBODY is entirely in equities.

The problem, though, is that even when you read posts on asset allocation on this forum, people tend to still say “increase your percentage of bonds as you get closer to retirement,” which is Boglehead and general retirement thinking. However, if you truly want to FIRE on a timeline running from zero investments to retirement in 10 years, the standard philosophy of asset allocation, and increasing your percentage of bonds the closer you get, will not get you to Financial Independence unless you’re just throwing a ton of cash at it.

Many people on this forum also say, “choose the asset allocation that helps you sleep well at night.” Well, the asset allocation that would help me sleep well at night is the one that has no risk of loss and would allow me to retire in about 12 months. As far as I know, that allocation does not exist.

So, my question to you remains: "How would you recommend allocating your assets as you save for FIRE, aiming to achieve Financial Independence in ~9 years, give or take?”

Also, FWIW, I’m not really interested in hearing from the folks that are posting on here and are like, “I’m 30 now and I plan to retire early at the age of 55.” If that’s you, you're missing the point.

if you truly want to FIRE on a timeline running from zero investments to retirement in 10 years, the standard philosophy of asset allocation, and increasing your percentage of bonds the closer you get, will not get you to Financial Independence unless you’re just throwing a ton of cash at it.

Fwiw, I disagree. Specifically, I don't think that 100% stock instead of allocating a % to bonds will greatly reduce the "ton of cash" you're putting into your stash. Meanwhile, any reasonable allocation will get you to FIRE if you're saving a lot. For a 9 to 10 year timeline, presumably invest between 65 and 70% of your after tax income. Arguably it's a ton of cash, but it's a ton cash no matter what allocation you use.

Consider the example where your FIRE allocation is planned as 70% stock, 30% bonds. I'm FIRE and that's about what I use for the financial assets (easily half of my stash is real estate equity). Take a 9 year glide path with 3% bonds at the start of year one, rising 3% each year to arrive at 30%. Suppose stocks rise 6%/year above inflation, bonds 1%. Pretend you get nothing from stability advantage that bonds provide - nothing from using bond sales to buy stock on dips. How different would your stash be at the end of 9 years?

Real life has lots of variance, but for simplicity, I approximate. The first year, 97% stock, will produce almost no difference. The last year, where bond are already 30%, will deliver a return of .7 x 6% + .3*1% = roughly 4.5%, a loss of roughly 1.5% compared to the all-stock version. Since the principal amount and bond % are both lower throughout accumulation, the total loss from bonds would probably be much less than 5x that amount - maybe 3x, or roughly 4 to 5% of your FIRE target.

In other words, IF the typical advantage of stocks holds true during the time of your accumulation, you'll lose a few percent, similar to a few months longer to FIRE. But the variance of a 100% stock portfolio is larger than just a few percent. So even a 100% stock portfolio doesn't guarantee faster accumulation. The bond path above might be a few months slower than all-stock on average, but if your 100% stock has a dip at the end like 2018 did, the bond path might be faster in real life than the all-stock version!

Unless you have a crystal ball, it's a bit of crapshoot either way. You are making a decision based on incomplete information. You can only choose what works for you, and will keep you investing regularly. This is a case where you can let the perfect be the enemy of the good. You can fall into analysis paralysis and keep researching, whereas the better decision is probably to pick something, invest regularly, and tweak later as you change your mind.

Not including cash, we are roughly 80% equities, 20% bonds. The equities are roughly split evenly between US and non-US stocks (probably a fair bit more US stocks these days due to years of over performance and lazy rebalancing). There is also a bit of tilt towards size (small) and value stocks).We started at 60/40, which is probably conservative, but it made us comfortable to invest and keep doing so regularly. I think that was more important than lost returns.

I think you couldn't go wrong by splitting evenly between US stocks, non-US stocks, a bond fund. I'm not saying it's optimal, but it's reasonable enough and easy to pick. Most people will probably be fine with any allocation (below 60% equities, I'll agree you are probably too conservative, all equities is a bit too risky for my taste, and I think you are missing out on a free lunch through annual re-balancing).

If you are close to retirement and like fancy terms, you can look up bond tents. We slightly emulate this with a rather large cash allocation.

Ah, good points here. I guess I should have specified even more, but this is exactly why I asked: a 70/30 allocation is still an aggressive asset allocation in retirement based on most standards. The Bogleheads Guide to Investing recommends a 40% equities/60% bonds (with some more diversification within those asset classes) asset allocation for an investor in early retirement, and an even more conservative allocation in late retirement.

BicycleB, it appears that while you agree that Bonds are important for stabilizing a portfolio, you still appear to trend much more heavily to the aggressive side with your equities investment.

Thanks for this info! Exactly the sort of thing I'm looking for.

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I think you couldn't go wrong by splitting evenly between US stocks, non-US stocks, a bond fund. I'm not saying it's optimal, but it's reasonable enough and easy to pick. Most people will probably be fine with any allocation (below 60% equities, I'll agree you are probably too conservative, all equities is a bit too risky for my taste, and I think you are missing out on a free lunch through annual re-balancing).

What do you think about REITs? Having read MMM's post on them and done additional research, I want to include them as a part of my allocation but am debating exactly how much.

I would suggest creating an excel sheet so you can visualise the actual difference over such a short period, because it is a lot less than many realise. Actually here I attached one that I used starting with zero, adding 50k/yr over 10 years, and using average estimates of returns. The thing to note is this - over short periods like 10 years, with average returns, you have such a tiny difference in returns that the benefit is almost insignificant, yet the downside is much more significant if you lose half of it in a bear market as opposed to a third with say a 70/30 portfolio. when there is virtually no upside, you are essentially taking a risk for no benefit- over short periods like 10 years, with above average returns, you definitely are not earning as much with a 70/30, but that upside is offset with the possibility of below average returns. also I would suggest you plug in some numbers to see exactly where you stand because over 10 years it is still going to be a lot less than you realise.

My own thoughts at this point are to increase bonds as my numbers increase and I have more money to protect and the more I will crap my pants in a bear market and the closer I am to retirement and less need to take risk.

For example, if my goal is 1m, I might do something like this<200k no bonds<400k 80/20<800k 70/30<900k 60/40 (because - why take a risk here when you have essentially won the game)1000k 60/40 - then glide up in retirement (aka bond tent)

If I had a set date, I would factor that in also because if you can not work longer, you need to be prepared for it and lower your equities for safety reasons.

What do you think about REITs? Having read MMM's post on them and done additional research, I want to include them as a part of my allocation but am debating exactly how much.

They are almost always recommended at a max of around 10% of equities.I don't think there is much of a need for them to be honest since they are already in the total market funds at around 3-4%. My question would be, what exactly is your reason for wanting them, and why more than the market cap amounts. If you don't have a very clear answer to this, I think it is a mistake to tilt towards anything just because "that person said to do it".

Also you may be mistaking REIT's for real estate equity. Personally owned residential real estate is completely different to REIT's which have liquid market risk. Don't mistakenly think they are similar. REITs are much more like equities than personally owned resi real estate.

I think REITs are interesting and a little complex. I read about them occasionally may soon post a question about them. There are a few investors here who are experts, or at least far more familiar than I!

That said - since half my stash is real estate (single family home, lots of equity, 3/4 rented out), it may be unwise for me to buy REITs. Haven't pulled the trigger. Bear in mind that this means no more of my portfolio is 35% of my portfolio is stock, 15% bonds. It's actually a little less, details below.

Part of my reasoning for this is local (I've been through several down markets over 25 adult years; rent in my city bounced down less than stock prices and home prices). Part is that I have other bits that counter the volatility of stock, such as a small pension due someday, and some reasoned faith in Social Security in that I think it won't disappear, it'll just cut my benefit a little. So 70% stock doesn't seem that much. It's really 30% or less of the total if you count my house and everything else.

For really long periods, like 50 or 60 years instead of 30, stock is super. Not sure how to compare REITs over that frame. But you might want to explore different asset classes and portfolios on portfoliocharts.com. It lets you pick different allocations, including ones with REITs, and displays results for all known cases based on historical data for various countries back to 1970 or so. It's free - actually a spare time project by a FIREd forum member named Tyler.

My question would be, what exactly is your reason for wanting them, and why more than the market cap amounts.

My reason for wanting them is that with dividend yield numbers of 5-9% depending on the REIT, in theory you could live off of the yield itself and wouldn't need to see the principle investment amount (not sure what the word for that is off the top of my head) grow itself. I'm interested in them for a different way to bring in $$ now and during retirement.

Also, I'm pretty sold on the concept of real estate as a finite resource and therefore being a good investment, 2007 & following notwithstanding. Can elaborate more on this if necessary.

Also you may be mistaking REIT's for real estate equity. Personally owned residential real estate is completely different to REIT's which have liquid market risk. Don't mistakenly think they are similar. REITs are much more like equities than personally owned resi real estate.

My question would be, what exactly is your reason for wanting them, and why more than the market cap amounts.

My reason for wanting them is that with dividend yield numbers of 5-9% depending on the REIT, in theory you could live off of the yield itself and wouldn't need to see the principle investment amount (not sure what the word for that is off the top of my head) grow itself. I'm interested in them for a different way to bring in $$ now and during retirement.

Besides this problem, chasing yields is going to make you focus on a concentrated part of the market which is the opposite of diversification and leaves you more open to concentration risk. I don't think 10% of your portfolio would be a problem, but many chase yields putting a very large portion in without realising the risk.

the standard philosophy of asset allocation, and increasing your percentage of bonds the closer you get, will not get you to Financial Independence unless you’re just throwing a ton of cash at it....loss and would allow me to retire in about 12 months. As far as I know, that allocation does not exist.

So, my question to you remains: "How would you recommend allocating your assets as you save for FIRE, aiming to achieve Financial Independence in ~9 years, give or take?”

This is going to sound like a joke, but don't underestimate the power of throwing a ton of cash at it. If you are aiming for retirement in a small amount of time, let's say ten years or less, your success is going to be driven almost entirely by your savings rate, not your investments. You most likely won't have enough time in the market for investment gains to outpace the effect of your savings rate. This is similar to the inconvenient truth that people who achieve extreme early retirement usually had rather high incomes during their working years, in addition to low expenses (not universally true, but more money, more savings, all else being equal).

If you want to retire in ten years, and you manage an 80% savings rate over that time, you could invest the entire time in government backed inflation protected bonds and have had almost nothing to worry about, and you would have over saved. Similarly if you want to retire in 12 months, you need a 96% savings rate, your investments won't matter (barring large speculative lottery ticket like bets).

All that said, being properly invested after retirement will be important, and you want to be aware of sequence of returns risk right before and after you retire. Regarding shifting to bonds closer to retirement (and shifting away after retirement) see this article: Using A Bond Tent To Navigate The Retirement Danger Zone

As is always said, savings rate is going to dominate. Ditch the clown car, ditch the McMansion, ride a bike (and probably increase your income). Riding a bike is the easiest :)

Have you read the Trinity Study? This is the study that MMM and others usually reference when suggesting a 4% SWR. It's worth a hour of reading and comprehending on a lazy Sunday.

What I get out of the study is that to truly have a portfolio that won't fail in 30 years you need a 75/25 AA for an inflation adjusted 4% withdrawal rate. A 3% SWR you can have anything from 100% stock to 25/75 stock/bonds and survive 30 years.

Based on the trinity study I am personally targeting a 75/25 portfolio when I reach FI with a 4% SWR. I will then ramp down to 60/40 and ramp down my work to part time until I hit 3% SWR and finally FIRE. I am currently 80/20 - and I'm very thankful now that equities are tanking to have some dry powder to sell bonds high and buy stock low.

Realize the bogleheads are MUCH more conservative than mustachians. Many want to retire with $4M portfolios with a $100k per year income. I personally think this is WAY overkill and would equate to something like a 1% withdraw rate for me.

While REIT's are not the same as owning property, they are correlated to the housing market. Having my own home, I refuse to also use REIT's. If I was a renter, I'd feel differently.

This is called the "yield trap". Dividends are not separate free money, they come out of the total return.

If the REIT yields 7% and you're expecting 7% return on the market, BUT the face value of equities don't increase but also don't decrease, you'd still get a 7% dividend yield, right? This is what I'm talking about. In essence, you should be getting that return from dividend yield whether or not the market goes up, which seems potentially very valuable.

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All that said, being properly invested after retirement will be important, and you want to be aware of sequence of returns risk right before and after you retire.

Right, so it becomes important at some point... but based on the above, at this point in time, would you recommend someone simply saving for FIRE in a money market account, since the markets are tanking? Or would that qualify as market timing?

Seems like any way you slice it, your rate of return plays a role. Whether it's a smaller role or a larger role is the big question I guess.

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Most REITs dividends are not qualified dividends, so they are taxed as ordinary income. I've had some REITs for years. About 5% of last year's dividends were qualified dividends.

Wouldn't this be a non-issue if you're holding the REITs in a tax-deferred account, like an IRA?

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MTB = mountain bike?

Yes indeed ;) Not a very Mustachian habit, but if you have to be addicted to something... it could be a lot worse.

This is called the "yield trap". Dividends are not separate free money, they come out of the total return.

If the REIT yields 7% and you're expecting 7% return on the market, BUT the face value of equities don't increase but also don't decrease, you'd still get a 7% dividend yield, right? This is what I'm talking about. In essence, you should be getting that return from dividend yield whether or not the market goes up, which seems potentially very valuable.

Your response is like someone telling you that financial advisors have been shown to not be able to out perform the market and then you responding with, but financial advisors can out perform the market. I'm not sure where to go with that response..

Dividends are not some sort of free money, they come out of the total return. The higher the dividends, the lower the growth (on average). It is not potentially valuable, it is potentially misleading.

Following from this, if you do get something yielding 7% with no growth, are you going to consider this as free separate money and just go and spend the whole 7% instead or reinvest anything over a safe withdrawal rate of 3-4%? From your understanding it is "free money" that you can spend all of and ignore the fact that your asset needs to be grown over time to keep up with inflation.

As I said, this is called the yield trap. Dividends are not separate free money, they come out of the total return.

REITs are fine, but I wouldn't recommend them for taxable investing pre-FIRE. Far too inefficient. After FIRE, assuming your income is low and you plan to spend those dividends, a little extra ordinary income is fine. I have REITs, but only in tax-advantaged accounts.

Pre-FIRE, 100% stock is ok for some people (those with the stomach to handle it as well as a flexible time horizon). Generally speaking, you should be as aggressive as you can handle, unless you have a particular target date, in which case you may wish to dial down the risk close to that date.

Post-FIRE, 100% stock is unwise, at least in the early years when you're particularly vulnerable to sequence of returns. Backtesting and Monte Carlo simulations show this has a lower chance of success than more conservative portfolios. You can mitigate this somewhat if you are able to reduce expenses significantly, take on part-time work, or otherwise supplement income early in retirement should a downturn occur. A cash cushion is another strategy, but it's not exactly a mitigation of 100% stock, since it really means you're X% cash, 100-X% equities. Akin to being X% bonds, 100-X% equities.

I'm currently 75% equity/25% fixed income pre-FIRE, though my equity is pretty aggressively invested (big chunks of Small Value, Emerging Markets, International Small). Early in retirement, I do plan to up the fixed income to ~50%, then grow more aggressive again as the years pass. Had I caught the FIRE bug earlier, I might've gone a little more aggressive, but we're getting close (I hope) to our date.

At least 50% in stocks (unless you are one of those real estate people)Not more than 50% in US stocks10%-40% bonds (note the center of gravity of 25%)20%-50% of stocks should be international (note center of gravity of 35% of stock allocation)(I say this for everything, but officially it is my FIRE recommendation)

Personally, I expect to have 25-30% bonds, and 40-50% of stocks internationally. But there is some pretty wide room for error there because I don't know what my feelings towards rental properties will be going forward. Right now I have one and it is about 16%.

The Trinity Study was aimed at people with 30 years to retirement, not early retirement. There's also a fwe ways to interpret "4%". You can say "4% of every years' assets", which means when the market drops you have to cut your spending. So during 2008, you suddenly would have cut all expenses in half... including rent/mortgage. That doesn't sound workable in practice. The other interpretation is 4% of your initial nest egg, adjusted for inflation. With that approach you spend the same amount each year, with no adjustments for the market. If you simulate that, it has a 10% chance of failure over 30 years (60/40 stock/bond, 4% withdrawal rate).. and Mustachians are more likely to have a longer retirement than that - it has a 16% chance of failure at 40 years.

Right now the "bond tent" approach hasn't been widely analyzed, but I suspect it's correct. The tent shape comes from increasing your allocation to bonds as you approach retirement. But then after retirement, you ease back into equities based on your retirement time horizon. You lower risk when a stock market correction can do the most damage, and allocate more equities when the danger has passed.

But the most traditional approach is the 60% stocks / 40% bonds allocation, so that's at least a good starting point before you've decided on a way to improve it.

This is called the "yield trap". Dividends are not separate free money, they come out of the total return.

If the REIT yields 7% and you're expecting 7% return on the market, BUT the face value of equities don't increase but also don't decrease, you'd still get a 7% dividend yield, right? This is what I'm talking about. In essence, you should be getting that return from dividend yield whether or not the market goes up, which seems potentially very valuable.

It sounds like you might be interested in dividend growth investing. This would include diversification into many sectors outside of just REIT's. It's a legit strategy, but requires you to take the initiative to learn. I believe Spoonman has/had a journal here where he talks about his DGI strategy in detail, along with resources for learning. He FIREd about 2-3 years ago and is traveling the world with his wife, so I think the journal has been relatively inactive, you may have to search back a bit.Found it

I realize most here will shun a DGI strategy, but you have to be comfortable with your investments. Check it out.

My advice is to play with different allocations in cFIREsim and the likes, personally I'm 60/40 long term, and OK with losing some potential gains for better sleep at night.

I'm with 2Birds1Stone. I'm long term 60/40 as that seems to work the best for me with comfort/Volatility. I am also not in the accumulative stage so much anymore as much as I like to say protectionism!

This is called the "yield trap". Dividends are not separate free money, they come out of the total return.

If the REIT yields 7% and you're expecting 7% return on the market, BUT the face value of equities don't increase but also don't decrease, you'd still get a 7% dividend yield, right? This is what I'm talking about. In essence, you should be getting that return from dividend yield whether or not the market goes up, which seems potentially very valuable.

It sounds like you might be interested in dividend growth investing. This would include diversification into many sectors outside of just REIT's. It's a legit strategy, but requires you to take the initiative to learn. I believe Spoonman has/had a journal here where he talks about his DGI strategy in detail, along with resources for learning. He FIREd about 2-3 years ago and is traveling the world with his wife, so I think the journal has been relatively inactive, you may have to search back a bit.Found it

I realize most here will shun a DGI strategy, but you have to be comfortable with your investments. Check it out.

Ha! I knew the math I ran had to make sense. I thought about writing a detailed response to Andy R with my thinking and then was like, "nah..."

I'll do some more reading on this as a possible portion of my portfolio.

My advice is to play with different allocations in cFIREsim and the likes, personally I'm 60/40 long term, and OK with losing some potential gains for better sleep at night.

I'm with 2Birds1Stone. I'm long term 60/40 as that seems to work the best for me with comfort/Volatility. I am also not in the accumulative stage so much anymore as much as I like to say protectionism!

So did you go with a more aggressive allocation while you were in the accumulative stage?

Here's the caveats:1. My budget is easily covered by my military pension and VA disability payments (both COLA protected).2. I withdraw about 2.5% of my stash each year for "fun money" and unexpected expenditures via a Roth ladder.3. I keep the next 2 years of the withdrawals out of the market entirely.

Those caveats help me take a very long view and not worry about what the market is doing at the moment. My goal is to keep my withdrawals at this level until I hit RMDs at 70.5.

Here's the caveats:1. My budget is easily covered by my military pension and VA disability payments (both COLA protected).2. I withdraw about 2.5% of my stash each year for "fun money" and unexpected expenditures via a Roth ladder.3. I keep the next 2 years of the withdrawals out of the market entirely.

Those caveats help me take a very long view and not worry about what the market is doing at the moment. My goal is to keep my withdrawals at this level until I hit RMDs at 70.5.

It's refreshing to actually get perspectives of people doing this! Thanks for the input!

A couple questions:1. It's unclear to me if the 2.5% you are withdrawing each year is held in cash, money market, bonds, etc.2. Is the 2.5% * 2 years of money you keep out of the market entirely part of your 5%ish allocation?2. If you're withdrawing 2.5% each year from equities to hold in bonds or cash, why not just keep it in equities? After two years it ends up being a revolving door anyway.

I'm a little older but since I started late, I try to think with a FIRE mindset, mostly to reinforce frugality. We have a very high savings rate (>60%) with no debt and I am 90/10 and my younger wife is probably something like 97/3. We're basically thinking in a ten-year time frame even though we both have self-employed jobs that have no age limit or any real physical limits that age could hinder. There's really nothing to retire from, although we want the option of cutting back or stopping if we like. So neither FIRE nor conventional retirement really fits our goals, which I call "semi-retired for life."

Instead of predicting the market, we use a fairly conservative 5 percent nominal growth in long-term planning. I have 5 percent REITS and 5 percent global REITS because they are not quite correlated with total stock market (I think the correlation is something like .72). Not a lot of diversification but it helps, in my view.

From reading these forums, I get the impression that not many FIRE practitioners really stop earning cold turkey and live solely on their investments in what one would consider a conventional retirement. I'd also consider owning or managing real estate a part-time job, but that's a different argument for purists who care about the strict definition of "retirement." The bigger point to me is even if you project a certain set of circumstances ten years from now, the reality is almost certain to be different--whether you end up working longer, changing plans along the way, or external circumstances change your plans for you. With that in mind, I think any reasonable AA can work as long as you avoid the wreckage of large behavioral errors and maintain a healthy save/spend ratio. Living on 10 percent less is just as good as making an extra 10 percent off your investments that year and spending it--plus your taxes are likely to be lower.

The Trinity Study was aimed at people with 30 years to retirement, not early retirement. There's also a fwe ways to interpret "4%". You can say "4% of every years' assets", which means when the market drops you have to cut your spending. So during 2008, you suddenly would have cut all expenses in half... including rent/mortgage. That doesn't sound workable in practice. The other interpretation is 4% of your initial nest egg, adjusted for inflation. With that approach you spend the same amount each year, with no adjustments for the market.

The trinity study clearly states "... the investor is assumed to initiate withdrawals at a specific withdrawal rate and then adjust each subsequent year’s, thus month's, withdrawal amount by the previous year’s percentage change in the consumer price index. "

Clearly, the intent is not to adjust 4% to the the portfolio size as described in your first scenario, but to start with an initial withdrawal rate and to adjust for inflation in order to preserve buying power. Further, if you were to withdraw the 4% from the portfolio size every year there would be no way to have a terminal value of $0.00. The ability to have a terminal value is key in the trinity study.

If you simulate that, it has a 10% chance of failure over 30 years (60/40 stock/bond, 4% withdrawal rate).. and Mustachians are more likely to have a longer retirement than that - it has a 16% chance of failure at 40 years.

Where are you simulating this? Also remember that most people in the US will start collecting some amount of social security within 30 years of retirement, so there is typically a boost in income at some point. This assumes a social security system exists which is another debate in-and-of-itself.

From reading these forums, I get the impression that not many FIRE practitioners really stop earning cold turkey and live solely on their investments in what one would consider a conventional retirement. I'd also consider owning or managing real estate a part-time job, but that's a different argument for purists who care about the strict definition of "retirement." The bigger point to me is even if you project a certain set of circumstances ten years from now, the reality is almost certain to be different--whether you end up working longer, changing plans along the way, or external circumstances change your plans for you. With that in mind, I think any reasonable AA can work as long as you avoid the wreckage of large behavioral errors and maintain a healthy save/spend ratio. Living on 10 percent less is just as good as making an extra 10 percent off your investments that year and spending it--plus your taxes are likely to be lower.

Great thoughts here. This is something my wife and have been discussing a lot lately. Should we just quit it all right now and just figure out how to earn money doing something we really love (and is mostly passive)? Or should we keep on grunting it out and aiming toward a more classic investment-funded version of FIRE?

The thing I keep coming back to is that no, we can't predict the future. However, I'd rather at least have the option of most likely being able to quit my job and not work indefinitely, because I'm not certain that I DO want to keep working.

While my wife and I could, for example, both drop to working less than 20 hours per week and still make ends meet, I don't want to be trapped into working 20 hours per week for the rest of my life.

With investing for retirement I think it's interesting to consider that yes, something could very well change in the future in our personal situations, possibly our health, our extended family, the economy... all sorts of things could happen. But the odds are high that investing now will help us out one way or another in the future, come what may.

...I'd rather at least have the option of most likely being able to quit my job and not work indefinitely, because I'm not certain that I DO want to keep working.

While my wife and I could, for example, both drop to working less than 20 hours per week and still make ends meet, I don't want to be trapped into working 20 hours per week for the rest of my life.

...the odds are high that investing now will help us out one way or another in the future, come what may.

Useful thoughts! It seems that your path is clear. Implementing these is likely to lead to an excellent life regardless of which exact allocation you use.

That said, since your "I don't want to be trapped into working" goal is paramount, it's possible that diversified portfolio beyond just stock and bonds could help you be safe (aka "not trapped") under a wider range of circumstances. Read lots of examples on portfoliocharts. com, such as the pinwheel portfolio, and note how many have close to 50% stock mixed with a variety of other things that include bonds but are not limited to them. Then decide your own allocation for this accumulation phase, and your proposed FIRE allocation if different.

Have you read the Trinity Study? This is the study that MMM and others usually reference when suggesting a 4% SWR. It's worth a hour of reading and comprehending on a lazy Sunday.

What I get out of the study is that to truly have a portfolio that won't fail in 30 years you need a 75/25 AA for an inflation adjusted 4% withdrawal rate. A 3% SWR you can have anything from 100% stock to 25/75 stock/bonds and survive 30 years.

Based on the trinity study I am personally targeting a 75/25 portfolio when I reach FI with a 4% SWR. I will then ramp down to 60/40 and ramp down my work to part time until I hit 3% SWR and finally FIRE. I am currently 80/20 - and I'm very thankful now that equities are tanking to have some dry powder to sell bonds high and buy stock low.

Realize the bogleheads are MUCH more conservative than mustachians. Many want to retire with $4M portfolios with a $100k per year income. I personally think this is WAY overkill and would equate to something like a 1% withdraw rate for me.

While REIT's are not the same as owning property, they are correlated to the housing market. Having my own home, I refuse to also use REIT's. If I was a renter, I'd feel differently.

Pretty much all the retirement research has shown that best risk-adjusted return (aka the efficient frontier ) is at 75-80% equities. You can verify this but playing around with FireCalc and CFiresim and pretty much alway end up with the best survival rates with portfolio near that AA for a 30 year retirement. The AA is often slightly higher for 40-50 year retirement, but a there aren't as many data points for that length retirement so you should take that with a grain of salt.

Now there isn't a huge difference in SWR between a 75/25 and 50/50 maybe a couple tenths of percent. So what makes you sleep well a night is important. Another disadvantage is people with high stock allocation often react really badly to a bear market and do something stupid like give 1/2 their money to an annuity salesman, like my sister and BIL.

A minor correction REITs are more highly correlated with stocks than with housing market especially in part because most REIT invested primarily in commercial real estate which is a separate market than residential real estate, and in part because REIT also response like bonds to interest rates. Valuation of REIT is almost entirely on free cash flow and not the value of the underlying properties.

We have been something like 90-95% stocks for most of our investing career. Now that we are closing in on FIRE we have started implementing the bond tent strategy. It is true that there isn’t a ton of research out there in it, but this has been our guide:

Our plan is to be 60% equities at FIRE and then slowly increase that to 100% (or thereabouts) over the first ten years of FIRE. The challenge for us is that there are no simulations that I could find on the best left-hand side of the bond tent. Meaning, when should the rise in bonds occur relative to projected FI? We are arbitrarily doing a straight line from where we were when we decided to implement this (90% equities) to 60% at a date we thought looked reasonable.

Now my simulations indicate we may well reach FI before that date, so part of what we need to reconsider is whether to speed the process of increasing our bonds up. I want to make sure, as much as possible, that we are responding to life events and not making it look like we are jumping into bonds like lemmings at the first sign of stock market wobble. My strategy of “just stop looking at my 401k statements for a while” response to the 2007-2008 dip makes me comfortable with holding a high amount of equities provided it is appropriate for our goals and timeline.

Here's the caveats:1. My budget is easily covered by my military pension and VA disability payments (both COLA protected).2. I withdraw about 2.5% of my stash each year for "fun money" and unexpected expenditures via a Roth ladder.3. I keep the next 2 years of the withdrawals out of the market entirely.

Those caveats help me take a very long view and not worry about what the market is doing at the moment. My goal is to keep my withdrawals at this level until I hit RMDs at 70.5.

It's refreshing to actually get perspectives of people doing this! Thanks for the input!

A couple questions:1. It's unclear to me if the 2.5% you are withdrawing each year is held in cash, money market, bonds, etc.2. Is the 2.5% * 2 years of money you keep out of the market entirely part of your 5%ish allocation?2. If you're withdrawing 2.5% each year from equities to hold in bonds or cash, why not just keep it in equities? After two years it ends up being a revolving door anyway.

1. I'm just leaving it in a money market. 2. Not sure I understand. This represents the next two years of money I intend to withdraw from my Roth IRA after it has marinated for 5 years after converting from Trad IRA.3. I don't want to worry about that money that I will "need" in the next two years losing value in the market. By setting my horizon for 2 years, I don't have to worry about whatever craziness the market is engaged in today. I understand that according to the trinity study, I'm being very conservative, but since I'm keeping my AA so equity oriented, I want to keep my short term money in cash.

You might reach your goal precisely because you were willing to take the risk of holding a high percentage of stocks for much / most / all of the next nine years. You might instead find that equity returns are so low for the next nine years that whether or not you FIRE will be almost entirely driven by your savings rate. If your savings rate wouldn't be enough to let you reach FIRE in nine years, on its own, then in a "low returns" scenario you might find your FIRE date pushed back multiple years, especially if sequence of returns risk hits your portfolio hard in about nine years.

If you'd like to adopt a more balanced allocation and push your planned FIRE date back a little further, then the level of variability in the date by which you reach FIRE will be likely to go down.

It's up to you as to how much variability you'd like to accept in the time frame within which you can FIRE.

In case you haven't run across it, I found the following resource helpful for getting a sense of the tradeoffs between risk and return associated with different allocations.

On a related note, the higher floor on returns from having more bonds tends to lead to a much greater consistency in expected returns across different asset allocation totals than one might expect. So, in the end you wouldn't necessarily be dramatically improving expected returns by adopting a highly aggressive asset allocation.

It comes down to your risk tolerance. The reason that the "rule of thumbs" for bonds tend to follow age is that as you get closer to retirement (you get older), you can tolerate the variations in the market less. For example, you retire in a 2008-like market. You look a year later in your 100% stock portfolio and you have half the money you had before the event. Now what? Go back to work? Cut from your 4% to 2%? Jump off a bridge?

The other end.....100% bonds. Now as the market exits the 2008-like event and skyrockets for over 10 years......you miss all the gains. Well, you kept safe during the dip but as time goes by, you don't get the gains. But indeed, this is less volatile and viewed as more "safe".

Saying that Bogleheads all want a $4M portfolio, make megabucks and want to retire with $100k a year is as accurate as saying all MMM think they can retire on 50k saved at 28 by working Starbucks twice a week. Both are inaccurate. (well, maybe not for the doctor married to a doctor whose first post on Bogleheads is something like "We exited residency last year and only made $350k total this year and will start real earning of at least $750-$900k next year.....can we buy Starbucks instead of Dunkin?". Plenty of posters here are regulars on BH. Including me. And Reddit PF. It is a bit annoying to see the exact same topic posted in all 3.

So decide for yourself what you can sleep with for an AA. Personally, I'm very set on 50/50 with international floating (meaning I let it do whatever the hell it wants). When it's time, I'll withdraw my 2% and when markets do Trump hissy fits, I'll look at my bonds and say "those are doing nicely". When the market soars, I'll look at my equities and say "those are doing nicely".

Your AA might be 90/10 or 10/90. Your the one who has to sleep with whatever your choice is.

I've settled on 70/20/10 equities/bonds/cash in for FIRE, though cash paying something now has helped me feel better about that. I was 100% equities until half-way to FI, then moved to 80/20 after half-way. INstead of going like 50/50 or 60/40, the cash buffer of what is effectively 2.5 years gives me what feels like enough protection from the bad dives like 2000 and 2008.

I've settled on 70/20/10 equities/bonds/cash in for FIRE, though cash paying something now has helped me feel better about that. I was 100% equities until half-way to FI, then moved to 80/20 after half-way. INstead of going like 50/50 or 60/40, the cash buffer of what is effectively 2.5 years gives me what feels like enough protection from the bad dives like 2000 and 2008.

With bonds currently paying 3% or less and plenty of money market accounts at 2.25% or more, I think holding cash is a no-brainer right now.

I've settled on 70/20/10 equities/bonds/cash in for FIRE, though cash paying something now has helped me feel better about that. I was 100% equities until half-way to FI, then moved to 80/20 after half-way. INstead of going like 50/50 or 60/40, the cash buffer of what is effectively 2.5 years gives me what feels like enough protection from the bad dives like 2000 and 2008.

With bonds currently paying 3% or less and plenty of money market accounts at 2.25% or more, I think holding cash is a no-brainer right now.

Thanks for the insights!

I just opened a 1 Yr CD Yielding more than 10 yr treasury. My official investment plan has me holding 15% intermediate or long term treasuries. Now I'm channeling that into CD's due to the current rate environment. I won't even think about buying more treasuries until yield on 10-yr is well above 3% again.

This is an example of how macro economic circumstances and personal goals should influence AA. Maintaining a static AA is detrimental, IMO.

So decide for yourself what you can sleep with for an AA. Personally, I'm very set on 50/50 with international floating (meaning I let it do whatever the hell it wants). When it's time, I'll withdraw my 2% and when markets do Trump hissy fits, I'll look at my bonds and say "those are doing nicely". When the market soars, I'll look at my equities and say "those are doing nicely".

It also comes down to what you value in life. Would I rather work an extra 3-5 years so I could live off a 2% withdrawal rate vs a 4% withdrawal rate? In my mind, that's a bigger risk than seeing numbers on a computer screen go up and down.

I'm glad I saw this post as it's timely in my case. I'm a little over 9 years out from FIRE and I'm starting the process of figuring out what my AA should be the next 9 years. The market run-up has caused a bit of second guessing I will admit (I took some money off the table a few months ago). After running the numbers, I was a bit shocked. Currently my invested net worth is as follows:

- 60% Equities (85/15- US/International)- 12% Bonds- 13% Ally CD's (40% of this is for college expenses coming up- but this is way too high as I figure out what to do with the other 60%)- 15% Rental Properties (this amount is the net value after mortgage- they also throw off 8% cash on cash yearly)

My primary residence has a lot of equity (20% of my TOTAL net worth) but I'm not sure how to categorize it so I don't really include it in any planning. I struggle to envision what I will do with it in 10 years.

I do greatly fear sequence of returns risks and feel intrinsically comfortable with a bond tent. The question is when to start that process. By recently taking 10% of my portfolio and putting it in CD's, I basically started the process. I currently don't have a clear strategy so I'm going to call it what it is... market timing. The market run-up basically made me realize the end isn't far off and how to plan the glide path to get to that point is definitely something I need to research.

I think my gut tells me to keep saving, keep my current allocation and get a little more aggressive once the sequence of returns risk is lessened. Hopefully more studies/smart people keep researching this.

In most of his posts, MMM tends to avoid asset allocation entirely, saying you could just have your funds 100% invested in a total stock market index fund and be alright. But if you read the Bogleheads (and most of the people even on THIS forum), NOBODY is entirely in equities.

I'm 100% in equities, but honestly 90% would probably be just as good.

I currently don't have a clear strategy so I'm going to call it what it is... market timing. The market run-up basically made me realize the end isn't far off and how to plan the glide path to get to that point is definitely something I need to research.

I'd don't think it's insane to look at the CAPE to 10 year return correlation. Particularly if someone is near FIRE date. Putting some preset thresholds on allocation based on CAPE is a very sane form of market timing. You'll find more information on this type on thing at bogleheads. Most here blindly follow MMM or JC Collins without personal research. They are pretty good methods if this stuff doesn't interest you, but if you have a hobby interest, you could do better than a static allocation.

Speaking of research, if you read The Simple Path to Wealth by J L Collins he is very clear that his portfolio is aggressive in part because he could return to work if he had to. I too will have this option when I FIRE but others may not.

Thanks Classical Liberal- Agree that I personally want to explore different thoughts on the subject of constructing a glide path I feel comfortable with (I enjoy reading well thought out perspectives by people smarter than myself). I read about the bond tent idea a year or so ago and it just seemed to make sense especially when a portfolio is at it's peak size. I will definitely head over to Bogleheads.

PDX- JC Collins/MMM approach made sense to me 4 years ago but somehow realizing that I have less than ten years (that's for a pretty fat FIRE) left has caused my mindset to evolve a bit. After living through the dot com crash, great recession and the "lost decade", I'm realizing it's prudent to look at many different ideas. Being "close" to FIRE is a new challenge to figure out. One that isn't as easy as throwing a standard benchmark in and feel comfortable.

The volatility of the markets is also an impetus to put a plan in place I can live with.

Being "close" to FIRE is a new challenge to figure out. One that isn't as easy as throwing a standard benchmark in and feel comfortable.

Right, that's why I started this thread :) Too many of the asset allocation discussions I've read deal with a 30-year timeline until retirement--not going from zero to retired in 7-10 years.

Here's a new specific question I've been wondering about asset allocation: FTBFX Bond Fund currently yields 3.19% with an expense ratio of 0.45%, for a real return of approx. 2.74%. VBMFX is 2.67% with an expense ratio of 0.15% for a real return of approx. 2.5%.

However, I can now get a 2.45% APY (and climbing) from a Money Market account that has no contribution limits, and I can easily withdraw my money from that account at any time if I want to invest in some other way--say, a rental property.

So, at this point, why would I want to buy bonds? Why wouldn't I just save the percentage of my portfolio that I would have put into a bond fund and instead stash it in a money market account, until such time as bonds begin to climb again? Or does that qualify as "market timing"?

I currently don't have a clear strategy so I'm going to call it what it is... market timing. The market run-up basically made me realize the end isn't far off and how to plan the glide path to get to that point is definitely something I need to research.

I'd don't think it's insane to look at the CAPE to 10 year return correlation. Particularly if someone is near FIRE date. Putting some preset thresholds on allocation based on CAPE is a very sane form of market timing. You'll find more information on this type on thing at bogleheads. Most here blindly follow MMM or JC Collins without personal research. They are pretty good methods if this stuff doesn't interest you, but if you have a hobby interest, you could do better than a static allocation.

This is the best analysis of this. I use this rule to figure out a SWR based on current CAPE10. His formula would have you at 3.5% right now.